FIXED INDEXED ANNUITIES
Fix indexed annuities are deferred annuities that pay interest based on changes to a market index.
Fixed Indexed Annuities were previously called equity-indexed annuities. Interest can increase with the index value, and can never be lower than zero, even if the market goes down. The principle and previous credit interest earnings cannot be lost in a market downturn. Insurance companies use a formula to determine the interest rate that is made up to two parts – the crediting method and a limiting factor.
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CREDITING METHODS
- The Annual Point-to-Point method measures the percentage change in the underlying index value from the beginning and end of the annuity contract year.
- The Multi-Year Point-to-Point method measures the percentage change in the underlying index value between two dates more than one year apart from one another.
- The Monthly Point-to-Point system measures the percentage change in the underlying index value each month, where increases are capped, but decreases are not. Then at the end of each index term, recorded monthly percentage changes are added together.
- The Monthly Averaging system compares the underlying index value on the first day of the index term to the monthly average of the same index at the end of the index term. This monthly average index value is equal to the sum of the monthly index values recoded each month over the course of the preceding index term, divided by the numbers of months in the term. At the end of each index term, the ending monthly average and starting index value are compared.
- The Daily Averaging system compares the underlying index value on the first day of the index term to the daily average of typically 252 trading days of the same index at the end of the index term. The daily average index value is equal to all of the daily index values recorded each trading day during the preceding index term, divided by the number of trading days in that term. The ending daily index value is compared to the starting index value of that term at the end of each index term.
LIMITING FACTORS
Because fixed indexed annuities guarantee principal protection, they do not offer 100% of the index market gains. They all have some type of limiting factor that bases interest earning on just a portion of the change in the market index.
For example, a cap rate is the maximum interest rate an annuity can earn during the index term. A participation rate determines the percentage of the increase in the underlying market index that is used to calculate the index-linked interest credit during the index term. The spread rate, or margin, is a specific percentage deducted from the total change in the underlying index value that determines the net amount of index-linked interest.
Six Reasons to Consider a Fixed Index Annuity (FIA)
1. Protect Your Principal
A FIA allows you to earn interest without actually buying stocks or index shares and protects principal from market losses.
2. Accumulate Funds For Retirement
Most annuities offer a choice of several indexes and some excluding indexes and offer the potential to earn interest based on external index changes.
3. Tax-Deferred Growth
Taxes aren’t due on FIA funds until you take the money out. This means that your money can grow tax free during the accumulation period.
4. Flexibility
Riders are available with some FIAs to address specific needs and can offer different crediting methods and flexible options for receiving income. A rider can either be built in or offered at an additional cost.
5. Rely on Guaranteed Income
One of the biggest benefits of an annuity is that it guarantees a stream of income in retirement. Some annuities offer guaranteed lifetime income, others offer income for a set period of time, and some offer the potential for increasing income.
6. Leave a Legacy
FIAs pay a death benefit to a beneficiary in the event that you pass away before taking annuity payments. This death benefit can also avoid being subject to probate under certain circumstances.
